Friday, November 14, 2014

Power of the Baseline

We have dirt cheap cell phone service: $5 or $10 a month, per phone, on a pay-as-you-go plan. We use basic Android phones through PTel, a T-Mobile "MVNO" (a kind of subcontractor who provides cell phone services, but does not actually own the network). How do we keep costs so low? We primarily use free options to call and text (Google Voice for free texts and free calls in Gmail) when we're by our computers or in wifi. Which is all the time. We learned about this stuff from IP Daley, the guru of all things telecom, who we met on Mr. Money Mustache's forums.
All in all, we love the set up. We get free telecom services when we're near wifi (along with the extra-nice benefit of talking on a wireless headset). But we can use our phones for calling, texting, or data when we are out and about. Of course, I rarely use data at all (and actually just turn it off on my phone so it doesn't try to update apps when I'm on 4G). But if I need to get directions or to look something up online, I just turn on the data setting on the phone. Easy peasy.

The rub is that, since we're averaging something like $14 per month for two smart phones, it's difficult to justify a move to another option on a purely financial basis. Even if we wanted to go to a different MVNO, like Republic Wireless, we'd never break even on the cost of the $300 phone, since our monthly costs would go up, too. Our baseline cost is only $7 per month per phone...and that baseline is the basis for comparison for any other option. Because it's so low, transitioning to a new company (even one we might like marginally more) is difficult.

Spending more is an option, of course. But to a frugal couple like us, it's a hard option to pursue since, you know, spending more money sucks. So the low cost baseline traps us a bit. For the foreseeable future, we're married to the low cost service. (Full disclosure, I love my cell phone company. It's by far the best option for us. But even if there were a better company out there for us, it'd be tricky to leave PTel.)

The flip side of this situation is when someone has a very high baseline: like a $500 a month car payment. In this situation, finding savings is easy, since so many other options are cheaper. When the 2015 F-150 goes on sale, complete with a "high-strength, military-grade, aluminum-alloy body," all of a sudden a trade-in for a lower, $429 monthly payment sounds like a win. Boom, there's $71 more in your pocket every month. Maybe you'll even put that money in your kids' college fund, or start an IRA. There's no limit to the options. Never mind that the new deal is still a bad one, and will feed on your discretionary funds like a parasite for another 48 months. Your cash flow is improved, so it must be a good move... right? With a high baseline, low hanging fruit abounds.

Which all goes to say: baselines can be deceptive. They are simply the status quo in your budget: the thing we're used to spending. But a baseline spend isn't necessarily a good basis for comparison. While the savings (or additional costs) against a baseline are real and undeniable, they don't tell the whole story.

When we use our current costs as the basis for comparison, we're often engaging in a form of anchoring. We're letting past financial decisions shape and influence future ones. We get used to spending very little, or a whole lot. It becomes a habit. Then it becomes the anchor by which we compare alternatives. Other choices are viewed relatively, rather than in absolutes: this new option is 20% less expensive, or $50 more per month. The anchor frames the analysis, simply because it's what we're used to. But what you're buying today doesn't necessarily have a whole lot to do with what's optimal for you.

A better approach is to work from a blank slate: to forget the things we're used to, and make purchasing decisions based on what provides the best value for usnow. This, of course, is hard. Maybe impossible.

A more reasonable suggestion might be to think long and hard before making financial decisions that will establish a very low baseline (like paying off your mortgage) or a very high one (like leasing a car). Either path will establish an extreme baseline, and can manipulate your future financial decisions.

33 comments:

You're so right - this baseline really does define how you view any changes you make. If my manage to save an extra $200 a month, I'm thrilled! But in reality, to achieve my goals I need to look at everything as a blank slate and make dramatic changes. I've actually tried to do this before, but I've really felt the overwhelming power of that baseline, because not only are you anchored to your current lifestyle, but it becomes so ingrained the longer you've spent at that baseline.

This makes it really clear why people have such trouble improving their financial habits, especially if they're used to spending almost everything they earn. At least your baseline is going to get you to FI soon!

Yep! This is evident in many walks in life. It's why people hold onto overvalued stocks: they can't answer the question would I buy or sell at the current price with the blank slate perspective. As you say maybe this is impossible!

Also very noticeable in conversations with friends from all different ranges of income and spending, on what they think is a reasonable price, for cars, phones, clothes etc. I have to smile and nod politely when people tell me how they grabbed a bargain phone contract at £50/month for the latest iWotsit. I've tried other reactions in the past: "you are paying what?!", or point out that there are much cheaper options out there, but it just ends up making them feel bad and causes an awkward situation. Next time I might just email them this article on a "totally unrelated" subject :)

Yeah, I feel the same way when I hear people excited about their $50 per month plan. It's a good deal in their eyes, and a crap deal in mine: just different baseline perspectives. It's hard to bridge that gap, as well...neither perspective is really 'wrong', per se.

Just ran into your website. I am so sick of my monthly cell phone bill. My contract is finally over next March and I can't wait to find the cheapest plan possible. I realize that I really don't need the service and I am flushing money down the toilet....yuk. Great post.

Hi Petrish! Glad to have a new reader, especially someone with such an original blog title.

Changing away from AT&T was a huge savings for us (there's that pesky baseline again). We went with the very lowest total cost option we could find. The downside is that now other options are very difficult for us to seriously consider. I'd just recommend really researching the options, so you're sure you'd want to stick with the new company long term. That IP Daley link in the article is a fantastic resource for checking out MNVOs.

I'm trying to think if there's a baseline we could lower or completely eliminate. We have Republic, but aren't reliably around internet enough to switch to Ptel. We could forgo one car and therefore one loan, but that would mean giving up one of our jobs as public transport doesn't get either of us to work. I guess we could drive something even cheaper, but we're at the p perfect point on the parabola where our car payment is less than monthly maintenance on a clunker. Am I justifying? Got me thinking as always!

I think this is why I had such a hard time adding a $188 car payment when I had none for so long. Now I'm kind of used to it again. But right now gas prices seem awesome because we got so used to it being so high for so long. When it goes up again it will be painful.

That's a great example of what I'm talking about, Tonya. The new car may even be less expensive than maintaining your old paid-for car. But because the payment was $0, and because repairs are too unpredictable (in either your current car or the old one), they typically won't figure into our baseline estimates of monthly costs.

We are learning, albeit slowly, to work from a blank slate perspective. But you're right: the baseline thing is a good thing when it's done right. We spend, for the three cell phones that we have in the house, about $160, or $14 a month. I just couldn't stomach spending more, I don't think. Now we have to work on getting a lower baseline in other areas of our budget. Motivating and awesome post as usual, my friend. :-)

I think with your budget you get to a point like you mentioned that your costs cannot be brought down any lower(I guess I could walk to work 9 miles one way or bike in the heart of winter in Chicago). You then start to make decisions based on your comfort level, ie train vs bike and if the $80 pre-tax a month is worth it. After that any costs are just getting rid of them entirely, like the mortgage you mentioned.

That's exactly the situation we find ourselves in certain parts of our budget, Steven. We have no car payment and a car that never needs repairs. Our home is paid off and rarely requires maintenance. We have those cheap-ass cell phone bills. This initially seems awesome, and in some ways it is. But the rub is that the low costs act as a type of handcuff: moving to a new alternative, even if its something we might enjoy more (e.g. - different neighborhood or city), our frugal nature makes it very hard to give up the low cost option.

Love this post! I had to do this for, of all things, groceries. When we moved, I was blown away at the supposed "sales" around here. I refused to buy things because the prices weren't what I was used to paying. Except, we kind of needed food, so I had no choice but to give in.

It can be really hard to adjust your baseline! In my case, I had no choice but to do so. Otherwise, I'm stubborn when it comes to paying more, so I can understand your point on the cellphone bill. Interesting to think about how it works on the other end.

I do the exact same thing with groceries, Erin, so don't feel bad. Even if I want chicken, I will refuse to buy it if it's above $3 a pound. I'm just used to paying a lot less, and can't get over that. I might even drive to another store. Which is silly, in a lot of ways. I might save four dollars on the chicken, but spent an extra 45 minutes of my time.

The higher cost baseline is a sneakier problem, I think. It can create real, but somewhat deceptive, opportunities for savings. Someone in a car lease (one bad decision) can end up making several more bad decisions (e.g. - several more leases or car loans that are slightly cheaper) as a result, all under the guise of savings against the baseline.

Interesting!I think that's a good point- you get used to spending a certain amount on something and that can seriously change the way you think about that expense in the future. I like having a low baseline for expenses if possible because it makes it more difficult to allow it to creep up over time. Of course, you win some and you lose some.

I think many people, myself included get into trouble when we rely on a group baseline. "Hey, that's what everyone is spending so it's normal." My cable internet provider told me that my building offers a bulk rate for internet and cable TV which includes HBO/Showtime, etc. According to my co-workers who have cable, it really is an excellent deal. But I pay $0 for T.V so it's hard to convince me to spend more, even though it's a great deal. And I think many stores use this "power of baseline"...I was at the supermarket and bought something for like $5 and it says original price $5.99 so I get excited that I saved a buck. Of course, the next day I go to a different market and the price there is $3.99...argh!

When we first got a Tracfone, it seemed like a great idea. Then we got a second one, for security sake, in case the other was out of juice. THEN, we got a Straight Talk phone because it was unlimited monthly. Now, between the Straight Talk at $50/month (including tax), and having to buy at least 1 Tracfone card each month at $22/month (including tax), we're up to $72/month. Wow, how stupid is that? I thought we were doing so good because we didn't have expensive phones or a contract! Argh! :\

Yep, that's true. The lower your monthly expenditures, the more you can invest, and the less you need to reach FI.

I like to think there's a bit more to it, as well. Extreme baselines have a funny way of affecting our future decisions. For example, we no longer have a mortgage. That has some unintended impacts on where we now might move, even if we might like that house or neighborhood a bit more. Simply put, we're very used to not having a mortgage: it'll take a good bit of convincing to take one on again. (The transaction costs of selling don't help, either.)

It'd be easier to make such a move if we still had our mortgage, or if we were renting.

Yeah, though if it helps at all, I don't think you're alone with that sort of bill. It's pretty common. On the plus side, there are a ton of lower cost options if you want to check them out on that IP Daley link in the post.

Just be sure to pick the one that's the best fit, rather than just jumping after the savings.

Very interesting and thought-provoking post, Mr. DbF! I agree that baselines can be deceptive, and very misleading, if one starts off high - then if there's any reduction, then it seems like a bargain! We're trying to reach even lower baselines with our 'fixed' costs, which are really non-essentials (i.e., cable, internet). Though the best baseline for those items would be zero, we aren't necessarily fully committed to do without, so we just try to reach zero as much as possible. So far it's worked, despite the annual phone bartering and threats to leave their business. We still think it's worth it, though!

I'm so glad I'm not the only one that barters his bills. I think DirecTV and my internet company are sick of negotiating with me at this point.,

Reductions from a high baseline really can be deceptive, because the savings, even relatively paltry ones, do improve our cashflow. They can lead us to bad situations that are just a bit better than our current one.

Great post. Perspective is really key. I find that I can be too much of a tightwad with some things because I want to save the money, but in the grand scheme of things, it doesn't make sense.

Example: We splurged and took our 10-year-old on a trip to Vegas last weekend (no, not for the gambling, she's a budding foodie and has been dying to try a Beef Wellington).

I was pricing out the budget hotels near the strip when I finally stood back and realized that the $200 I could save wasn't worth it. It was our daughter's first time in a hotel and we were going to be short on time anyway given the length of the trip. A nice hotel mid-strip was worth every penny.

That's a good example of how what we're used to paying (and Mrs. DB40 and I are used to staying in some very affordable digs) might negatively influence a unique experience, like your daughter's first time in a hotel in a cool place like Vegas. I also think it's pretty cool that your kid's a budding foodie. At ten, I think I was just a budding jerkface.

Disclaimer: This blog is written for entertainment purposes only: not to give advice. I'm just some dude on the internet, and one without a whole lot of credentials. It's a good idea to consult with professional before making investment, tax, or financial decisions.